Monday, June 17, 2013

There is widespread agreement that the proposed spectrum "incentive
auction" the Federal Communications Commission plans to conduct –
hopefully! – in 2014 is one of the most important action items, if not the most important action item, on the
agency's agenda.

And there is an equally widespread consensus that the
auction necessarily will be the most complex spectrum auction ever conducted by
the FCC in light of its two-sided offering and bidding nature. Broadcasters
will have an opportunity to offer spectrum for bid in a so-called "reverse
auction," and then wireless companies facing what the FCC itself has described
as a "spectrum crunch" will have the opportunity to bid on the
offered spectrum in the so-called "forward auction." And all of this
presumably will be subject to auction design rules governing some "repacking"
by the FCC of the offered spectrum into chunks sufficiently attractive to
induce bidding by wireless companies.

Oh, by the way. According to congressional direction, the
incentive auction is supposed to be designed in a way that maximizes the auction
proceeds, so that $7 billion of the proceeds go to establishment of a public
safety "first responder" network, and another $15.2 billion goes to
offset other budget costs and to deficit reduction.

So, you can understand why there is such widespread
agreement that the incentive auction will be inherently complicated. Given
this, you can understand why the FCC should do everything it can to follow the
KISS principle. KISS, of course, is the acronym for "Keep it simple,
stupid." As Wikipedia
puts it: "The KISS
principle states that most systems work best if they are kept simple
rather than made complex; therefore simplicity should be a key goal
in design and unnecessary complexity should be avoided."

Surely, with respect to the incentive auction, "unnecessary
complexity should be avoided."

The FCC should KISS it.

If nothing else, in the context of the proposed
auction this means the Commission should resist the urgings of those, including
Sprint and T-Mobile, who want the auction to be designed in such a way so as to
exclude AT&T and Verizon from bidding on certain spectrum. The Commission
should resist suggestions that it manipulate the auction in this way, even when
such suggestions are offered, as they invariably are, in the name of
"promoting competition."

In reality, these pleas for gaming the auction are
very unlikely to promote competition or consumer welfare. Rather, they are
requests that the agency, by designing rules to exclude AT&T and Verizon,
"manage competition" ex ante
so as to reach a preordained market result. Previous FCC attempts to game
auction results by adoption of special bidding rules and extraneous eligibility
conditions have not worked out well from the perspective of taxpayers or
consumers. Likewise, any such attempt at FCC-directed managed competition for
this auction almost certainly will not end well for consumers or taxpayers
either.

Not only would FCC attempts to design
"exclusion rules" to foreordain particular market results be
complicated to draft – thus violating the KISS principle – such attempts are
unnecessary from a competitive standpoint. There is no reason to believe the wireless
marketplace, presently dynamic and competitive, will not remain so without
adoption of special rules intended to exclude AT&T and Verizon, or any
other bidders for that matter.

The Department of Justice has submitted comments
to the FCC supporting some (unspecified) form of exclusionary rules designed explicitly
to ensure that Sprint and T-Mobile "win" a certain amount of spectrum
at the incentive auction. But such preemptive gaming appears unnecessary to
preserve a competitive wireless marketplace. Indeed, in the very comments
professing concern that AT&T and Verizon may attempt to use the auction to
"foreclose" their smaller rivals from gaining as much spectrum as they
otherwise might wish to possess at their preferred (depressed) prices, DOJ says
"the four largest wireless carriers (AT&T, Verizon, Sprint, and
T-Mobile) compete across many dimensions, including coverage, network speed,
network technologies, and price."

Of course, if a wireless company is going to be
in a position to compete in the marketplace, acquisition of a certain amount of
spectrum, whether at auction or through secondary transactions, is required.
But I was struck by these two sentences in a June 10 Wall Street
Journal news report on SoftBank's latest increase in its offer to
acquire Sprint:

"With
more than 55 million subscribers and $35 billion in revenue, Sprint offers a
path for either investor to profit from the boom in wireless Internet traffic.
Sprint's potential is magnified by its roughly 50% stake in Clearwire Corp.,
which controls a huge cache of spectrum needed to carry the growing volume of
data traffic."

Indeed, Clearwire alone controls 160 MHz of spectrum in the
top 100 metropolitan markets, and Sprint and Clearwire together control 210
MHz. Verizon controls 115 MHz and AT&T 113 MHz in these same top 100 metro
markets. Certainly, with its "huge cache" of spectrum, as the WSJ
puts it, it is difficult to understand why anyone, including the Justice
Department, would argue that the FCC's auction rules should be drawn in a way
that favors Sprint.

I may have missed it, but, as far as I know, in the bidding
war going on for Sprint between SoftBank and Dish, neither suitor has said that
the acquisition is contingent on the FCC adopting rules preferring Sprint (and
T-Mobile) in the forthcoming auction. In other words, these suitors sprinting
to the finish line appear to be confident of Sprint's competitive marketplace position
and not particularly concerned about its prospects in the auction.

T-Mobile is not presently as spectrum rich as Sprint. No
company is. Nevertheless, in recent months, T-Mobile has increased its own
spectrum holdings through its merger with MetroPCS and its secondary market spectrum
acquisitions from AT&T and Verizon.

Significantly, both Sprint and T-Mobile are backed by highly
capitalized, world-class firms. It looks like Sprint shortly will be acquired by
SoftBank, a leading Japanese wireless, broadband, and Internet company, or, if
not, by Dish, one of the two U.S. satellite operators. Dish has substantial
spectrum holdings of its own. And T-Mobile is owned by Deutsche Telekom, one of
the world's largest communications companies. In other words, both Sprint and
T-Mobile have the financial resources available to bid for whatever spectrum
they deem they need without the benefit of any preferential bidding rules.

Thus, it is difficult to understand why the FCC would want
to tailor its bidding rules in a way to prefer either Sprint or T-Mobile. This
is especially true when it is all but certain that adopting rules designed to
exclude AT&T and Verizon from bidding will reduce the overall auction
proceeds to the detriment of taxpayers and the prospective public safety
network.

And, as importantly as the likely diminishment in auction
proceeds, wireless consumers will be the losers as well. If no companies are deliberately
disadvantaged by the auction rules, then those companies that presumably value
the spectrum the most will bid the most for it and put the spectrum to the highest
value use serving their customers' needs. Under the present competitive market
circumstances, the Justice Department's theory of bidding by AT&T and
Verizon to "foreclose" their rivals appears highly conjectural.

At bottom, the FCC should not make the forthcoming incentive
auction anymore complicated than it necessarily already will be by attempting
to fashion complex exclusionary rules to favor bidding by some entities over
others. Instead, it ought to KISS this auction – or "Keep it simple, stupid."